November 06, 2014
Charles Lane expresses his pain at the fact that the minimum wage remains hugely popular with large segments of the population. He tells readers:
“It works as a tax on business, whose benefits often accrue to middle-class teenagers, and whose costs — fewer jobs and higher prices — are partly borne by needier intended beneficiaries.”
Imagine that, a policy that might have some consequences we don’t like — sort of like any policy that actually exists in the real world. Thankfully, unlike the Earned Income Tax Credit (EITC), which gains enormous popularity among conservatives when the minimum wage is discussed, the minimum wage doesn’t lower the wages of large groups of workers and act as a subsidy to low wage employers. And, the EITC also must be paid for, and the usual way we pay for government spending is through taxes. So the EITC also works like a tax, since it will be paid for with taxes. Such is life.(Btw, as folks familiar with the research know, the jobs consequences are minimal and mostly mean people spending more time between jobs since there is high turnover in these jobs.)
Anyhow, Lane wants politicians to stop raising the minimum wage so he proposes indexing it to the rate of inflation. The idea of indexation is good, but Lane has the wrong target. Back in the good old days, when we had 4.0 percent growth and 3.0 percent unemployment, the minimum wage rose in step with productivity. If it had continued to rise in step with productivity since its peak level in 1968 it would be more than $17 an hour today.
Raising the minimum wage in step with productivity makes good economic sense. After all, why shouldn’t workers at the bottom of income distribution share in the gains of economic growth. The alternative is an ever-growing gap between minimum wage workers and everyone else. That may be Charles Lane’s dream, but that probably is not the world envisioned by most supporters of the minimum wage.
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